Kan now faces gridlock, internal revolt

Floating tax hike backfires; coalition must now solicit new partners to keep hold on chamber

Voters handed a painful loss to the ruling Democratic Party of Japan on Sunday, with all signs indicating that more political instability — and even an internal revolt — could be in store for Prime Minister Naoto Kan.

“This will certainly induce an overhaul of the coalition government and it may take some time for the DPJ to find a compatible partner and stabilize the administration,” political analyst Minoru Morita said.

The ruling bloc lost its majority in the Upper House with its minor partner, Kokumin Shinto (People’s New Party), on Sunday evening.

The loss will bring legislative gridlock to the Diet because the DPJ, which parted ways with the Social Democratic Party in May, is now short of the two-thirds majority in the Lower House needed to swiftly override any Upper House rejection of legislation.

In addition to calling on other parties to join his coalition to avoid this impasse, Kan faces re-election as DPJ president in September and must erase any doubts within his own party about his ability to lead.

“The decision on any new coalition partner may not happen until well after the DPJ presidential election,” Morita said, predicting Kan will face pressure from both the opposition camp and from within his party.

But the first order of business for Kan’s Cabinet after Sunday’s setback will be to find allies that can keep the DPJ-led camp in control of the Upper House.

Topping this list is Your Party, which made significant progress in Sunday’s poll. The best scenario for the DPJ would be to get the minor party on board the coalition and open an extraordinary Diet session later this month.

Kan’s overture to Your Party was obvious even during the election campaign. “Small parties need to tag along with bigger parties” to achieve their political goals, Kan said during a campaign stop earlier this month.

But Your Party chief Yoshimi Watanabe has shown a noncommittal stance, and some of his party’s campaign slogans also contradicted DPJ views, including his goal of promoting growth-oriented policies to restore Japan’s fiscal balance.

Watanabe, former administrative reform minister, said Sunday that there was a chance Your Party could ally itself with the DPJ on a policy-by-policy basis, including on civil service reform.

Another option for the DPJ would be to form a grand coalition with the Liberal Democratic Party, but experts don’t see this happening anytime soon because the two parties were bitter rivals during the election campaign, although many in their ranks share the same views. LDP head Sadakazu Tanigaki on Sunday flatly denied he would join hands with the DPJ.

If Kan falls short of wooing Your Party or New Komeito — another possible coalition candidate — the DPJ would have to seek partnerships with other parties on a policy-specific basis.

Pundits fear this ploy would delay Diet deliberations, if not induce stalemate at every corner for Kan.

This wasn’t what the DPJ expected when Kan revived the party’s popularity last month by replacing the unpopular Yukio Hatoyama, who, along with then DPJ Secretary General Ichiro Ozawa, quit under a cloud of scandal.

At the time it seemed possible for the DPJ to win 60 seats in the Upper House election, giving it a single party majority. Then Kan took the dangerous step of proposing debate on a consumption tax hike, possibly to 10 percent, throwing the issue at recession-weary voters. Even though this caused his approval rating to nose dive, he continued to call for bipartisan talks on tax reform up until the last moments of the election campaign.

“In 10, 20, or 30 years from now, I hope the public will see this government as the defining (factor) that began rebuilding Japan’s economy, fiscal policy and social welfare,” Kan said Saturday during a speech in Tokyo.

Kan tried to neutralize the LDP’s campaign ploy of proposing hiking the 5 percent consumption tax to 10 percent, by effectively making the goal a potential one for the DPJ. In the end, his approval rating quickly fell about 20 points.

Observers agree a tax hike may be unavoidable but feel Kan clearly jumped the gun on proposing this.

“Kan has long been a firm believer in raising the consumption tax, but he failed to put the issue on the table properly,” said Satoru Matsubara, an economics professor at Toyo University.

When Kan replaced Hatoyama, over 60 percent of the public appeared to be in favor of raising the consumption tax in order to curb the country’s growing fiscal debts.

With Japan’s accumulated public debt projected to exceed ¥862 trillion at the end of fiscal 2010 — or some 180 percent of gross domestic product — experts agree it’s inevitable the public will be subjected to a tax raise.

Kan made a vigorous pitch but failed to provide a specific tax hike blueprint to the public, Matsubara said. Kan’s proposal also flip-flopped during the campaign as he waved exemptions and rebates for certain income classes and targeted businesses.

At one campaign stop, Kan suggested people whose annual income reached only ¥2 million may be eligible for tax compensation, but at another rally, he raised the bar to ¥4 million. He also did not explain how the tax breaks could work.

“Kan’s approach left voters confused. He never presented specifics of his plan, including the timing to raise the tax or how the actual hike would be carried out,” Matsubara said.

Voters quickly noticed this failure by Kan and turned their backs on the DPJ Sunday.

Matsubara said that regardless of the election outcome, the DPJ-led government, which can stay in power because of its Lower House majority, will face a tough road ahead over the tax and other issues.

“Discussions on raising the consumption tax will depend heavily on which party the DPJ invited into the coalition. The LDP has pushed for a hike to 10 percent, while Your Party has been adamantly opposed to any increase. Everything remains unclear at this point,” he said.

Meanwhile analyst Morita believes Kan’s team’s days are numbered.

“With Kan’s election strategy costing the coalition government its majority in the Upper House, it is easy to foresee unrest within the DPJ. The resignation of (DPJ Secretary General Yukio) Edano is even a possibility,” Morita said.

Kan appointed Edano and other vocal critics of party don Ozawa last month, despite concern within the party over Edano’s lack of election strategy management.

Observers say Edano may be the fall guy for the poll setback, thus leading to the resurrection of Ozawa’s influence within the DPJ.

And while those close to Kan have denied that he will step down because of Sunday’s outcome, some liken Ozawa’s pent-up frustration to magma ready to erupt.

“It’s questionable if Ozawa himself will run for the DPJ presidency in September,” Morita said. “But there is no doubt he will be up to something.”